Skip to main content

Modeling financial contagion using mutually exciting jump processes

Author(s): Ait-Sahalia, Yacine; Cacho-Diaz, Julio; Laeven, Roger J.A.

To refer to this page use:
Abstract: We propose a model to capture the dynamics of asset returns, with periods of crises that are characterized by contagion. In the model, a jump in one region of the world increases the intensity of jumps both in the same region (self-excitation) as well as in other regions (cross-excitation), generating episodes of highly clustered jumps across world markets that mimic the observed features of the data. We develop and implement moment-based estimation and testing procedures for this model. The estimates provide evidence of self-excitation both in the US and the other world markets, and of asymmetric cross-excitation, with the US market typically having more influence on the jump intensity of other markets than the reverse. We propose filtered values of the jump intensities as a measure of market stress and examine their out-of-sample forecasting abilities.
Publication Date: Sep-2015
Citation: Ait-Sahalia, Yacine, Cacho-Diaz, Julio, Laeven, Roger J.A. (2015). Modeling financial contagion using mutually exciting jump processes. Journal of Financial Economics, 117 (3), 585 - 606. doi:10.1016/j.jfineco.2015.03.002
DOI: doi:10.1016/j.jfineco.2015.03.002
ISSN: 0304-405X
Pages: 585 - 606
Type of Material: Journal Article
Journal/Proceeding Title: Journal of Financial Economics
Version: Author's manuscript

Items in OAR@Princeton are protected by copyright, with all rights reserved, unless otherwise indicated.